Sri Lanka needs to raise $ 1.5 billion from international capital markets in the final year of the current IMF program. This is not a rough estimate; it is built into External Financing Gap and Program Financing, 2022-27, agreed under the Extended Fund Facility (EFF) in the last review. In addition to the IMF’s own $ 3 billion facility, the multilateral budget support from the World Bank and the ADB, and the 2024 debt restructuring, this is the balance funding that the program design assumes will come from the capital market, through a issuance of international sovereign bond.
The EFF, a four-year arrangement approved in March 2023, is now moving through its Seventh Review and is due to conclude in April 2027. Sri Lanka should invite international bond investors to lend it money again in 2027, at scale, just five years after the country’s first sovereign default in history. Sri Lanka will reach international capital market while its long-term foreign currency rating from Standard and Poor’s and Fitch Ratings remains at CCC+, only a few notches removed from default itself. That is the practical test in front of the country. Before we understand what options are available to Sri Lanka, it is important to understand the current situation.
Current position
Since the default in April 2022, Sri Lanka has restructured its international sovereign bonds, a process completed in December 2024. The combined Fifth and Sixth Reviews of the EFF were completed in May 2026, and the Seventh Review is currently under assessment, IMF team just left the country. This is a genuine progress from both Sri Lanka’s and international capital market perspective.
But the rating itself has hardly progressively moved up. CCC+ from S and P and Fitch, and the equivalent Caa1 from Moody’s, still sit well inside deep speculative grade, well below the BBB-/Baa3 line that separates investment grade from speculative grades, and several notches below even a single B rating; the category Lanka used in be prior to the default. Nevertheless, Sri Lanka has sufficient breathing space since there are no foreign currency bond maturities until 2029. That buys time. However, it doesn’t make the $ 1.5 billion the program expects to raise from the capital market in 2027 any cheaper.
Economic growth was reasonably good for past 2 years, but the picture has softened somewhat in 2026. Growth in 1Q2026 was 5.1%, it slowed down in 2Q2026 to 4.2%, lowest rate in the recent past. Projected economic growth for 2026 is at around 3-4.0%, down from 5.0% in 2025, largely due to the external shock emanated from ongoing middle East conflict. Inflation has moved the other way – from 1.6% in February to 8.0% by August, mainly on higher energy prices. The Central Bank pre-emptively raised the policy interest rates by 100 basis points to control the inflationary impact, though monetary policy has limited ability to fight against cost-push inflation.
None of this points to instability. It is also far from standard profile of a sovereign that markets will automatically treat as low risk when the existing IMF program ends. Markets are not really concerned about how good a program succeeded, rather they assess what happens once it is over.
International Sovereign Ratings
It is worth understanding what a CCC+ rating means for the pricing of that bond. The CCC band is generally understood by the rating agencies to indicate a credit that is currently vulnerable, and dependent on favourable business, financial and economic conditions continuing in order to meet its obligations. It stands well below B and BB rated credits, which are themselves still speculative grade but are seen as facing materially less near-term risk.
In practice, this means a bond priced at CCC+ would need a substantial spread over US Treasuries to attract investors – plausibly in the high single digits or more, depending on tenor and market conditions at the time of issuance. That is an expensive way to raise $ 1.5 billion. Moving even one or two notches up the scale, to a B rating, would make a meaningful difference to that cost. The rating is not just a scorecard; it directly determines cost and efforts of market re-entry by Sri lank after the default.
Two pathways
This is where the decision about what follows the current EFF becomes a market question. Sri Lanka has two broad options once the current program concludes in April 2027. The first is to exit the IMF relationship altogether and try to raise the $ 1.5 billion purely on its own post-program record, with no external, independently verified check should fiscal discipline weaken under a future government. The second is to negotiate some form of successor engagement with the IMF, not necessarily more borrowing, but an arrangement that keeps a credible, ongoing review process in place when the country is asking bond investors to reassess its risk.
The second option is undoubtedly the stronger one. Next question is which instrument should Sri Lanka select to continue the IMF engagement.
Five optional instruments
The IMF has five broad instruments that could plausibly apply once a facility such as the EFF ends, and they differ mainly along three lines: whether they provide financing, how strict the conditionality is, and whether they carry the formal endorsement of the Executive Board. The most important factor is the formal endorsement of the Executive Board of the IMF.
The Flexible Credit Line and the Precautionary and Liquidity Line are contingent financing instruments with fairly light conditionality, but they are reserved for members with very strong policy track records and buffers, assessed at the time of approval. A CCC+ rated country, a little over a year removed from default, simply does not meet that bar yet, regardless of how well the current program has progressed.
A second EFF, or a Stand-By Arrangement, would provide continued or fresh financing under the usual conditionality. The problem here is less about eligibility and more about signalling. Repeated request of monetary assistance from the IMF so soon after exiting default risks reinforcing the idea that Sri Lanka is a serial IMF borrower. It is not the message the country wants to send to the international bond investors while persuading them to invest in $1.5 billion bond issuance.
A Staff-Monitored Program is at the other end of the scale, mostly informal, staff-level only, with no financing and, importantly, no Executive Board endorsement. It is the lightest option, but that is also its weakness. It does not carry the institutional weight that bond investors would consider as a credible, independently verified signal.
That leaves the Policy Coordination Instrument, or PCI – a non-financing instrument the IMF introduced in 2017 for members that no longer need Fund resources but still want a close, monitored relationship with the Fund. It applies the same upper credit tranche standard of conditionality as a lending arrangement, with formal reviews roughly every six months, each endorsed by the Executive Board of the IMF, but without any actual disbursement.
The argument for Policy Coordination Instrument
There are four reasons this instrument fits Sri Lanka’s position better than the alternatives.
The IMF monetary assistance is not involved. That removes the optics of renewed borrowing at a moment when the whole point is to demonstrate that the country has moved past crisis-era financing.
The discipline itself is unchanged. Policy commitments are still measured against the Fund’s strictest conditionality standard, and reviewed formally, with Executive Board endorsement, at regular intervals. The substance remains unchanged though no monetary assistance is extended.
This is probably the most important point for the investors when Sri Lanka ask them to fund $1.5 billion, the Fund continues to act as an independent observer of government policy. That is close to exactly the kind of reassurance a post-default sovereign needs to offer – someone credible and independent, reporting regularly on whether commitments are actually being kept.
It does not close off other options. A country on a well-performing PCI can still access emergency IMF resources reasonably quickly – through a Rapid Financing Instrument, for instance, similar to what Sri Lanka used following Cyclone Ditwah if a genuine balance of payments shock were to occur. Choosing a PCI is not giving up a safety net. It simply avoids carrying the stigma of an active loan when one is not actually needed.
This is not a hypothetical. Ghana is going through almost exactly this sequence in 2026, completing the final review of its own Extended Credit Facility and requesting a 36-month PCI, explicitly described by the IMF as a bridge to Ghana’s own decision on when to return to international bond markets. It is a reasonably close parallel to where Sri Lanka will be in April 2027, including the added pressure of external debt repayments resuming from 2028, a period a PCI negotiated around the Seventh and Eighth Reviews could help bridge.
A point about governance, not just instruments
There is a broader point here that goes beyond which instrument is technically the best fit.
The discipline Sri Lanka has operated under since 2022, the fiscal targets, the structural benchmarks, the quarterly reviews, all were imposed on the country. It came with the default; it was not something the country chose for itself.
A PCI would change that relationship. It would mean Sri Lanka choosing to keep a credible, independently monitored reform framework in place after the point at which it is no longer legally or financially required to. That is a different signal to markets than simply meeting program targets because the program requires it. A government that voluntarily submits itself to continued, Board endorsed scrutiny is telling investors something a purely domestic commitment cannot – that the discipline is expected to hold even once the external requirement to maintain it has been removed. It is a credible distinction and a signal to bond investor who would require to price a CCC+ credit five years after default.
Conclusion
The choice facing Sri Lanka after the EFF is not really about whether to keep borrowing from the IMF. The strongest option no further IMF borrowing at all. It is about how the country maintains a credible, independently monitored anchor for reform in place at the moment it needs bond investors to accept a CCC+ credit, five years after default, at a price the country can reasonably afford.
The Policy Coordination Instrument appears to be the one that fits Sri Lanka’s current position. It avoids the eligibility problem that rules out the liquidity lines, the signalling problem that comes with another financing program, and the credibility problem of a staff-level-only arrangement, while still preserving quick access to Fund resources if genuinely needed. With final set of Reviews now under way, and a $1.5 billion market financing at the end of the program, this is a decision should be considered well before April 2027 deadline arrives.